Retirement Village Financial Trap

The impact of the following on the $ value of capital over time both individually and collectively has the capacity to create for many the so named retirement village financial trap.

This can create a no u-turn situation for a sizeable number of retirement village residents.

 

• Deferred fee


• Inflation


• Loss of earnings on the reducing refundable amount (deferred fee)


• Loss of earnings on the fixed refundable amount (interest free loan to the operator)


• Deferred fee calculated on the exit price rather than the entry price.

This so named retirement financial trap is where the $ value of the money you loaned interest free to the retirement village operator is so diminished over time by inflation that it places you at a point where you can no longer afford to leave the village and re-enter the property market or have sufficient money to enter a nursing home of choice.

The higher the percentage of total life savings used to pay the entry cost of the village –

1. the higher the likelihood of being in the so named ‘poverty trap’ on departure.

2. the higher the likelihood of requiring family assistance due to a lack of capital.

3. the higher the likelihood of being dependent on a government funded nursing home placement rather than a placement of choice.

When the nice salesperson says “Don’t worry about the deferred fee, it is paid on exit and something your children will deal with” do not accept that statement without further research.

The impact of the deferred fee, loss of earnings, inflation etc. is something many will have to deal with. A change in circumstances without further financial resources could leave a person in a financial position they did not envisage at the outset. It is important to anticipate what the financial position might be in say 5, 10, 15 years.

Additional capital resources may be needed to meet the cost of any change in circumstances – ie: choose or need to leave the village, re-enter the property market, meet the cost of a nursing home bond to enable entry into a nursing home of choice.

The following graph shows how quickly a no u-turn situation arises when there is a steadily rising property market, the ability to make a u-turn because of a change of circumstances diminishes as each year passes. Many retirement village residents enter a financial trap they did not see on entry as a result of the ever decreasing value of their in-going capital amount.